Answer: Decrease by $40 million .
Explanation: If the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve. When people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will decrease by $40 million .
The reserve requirement is the amount of funds a bank must have on hand each night. It is a percent of the bank's deposits. The nation's central bank sets the percentage rate. In the United States, the Federal Reserve Board of Governors controls the reserve requirement for member banks. The bank can hold the reserve either as cash in its vault or as a deposit at its local Federal Reserve bank. The reserve requirement applies to commercial banks, savings banks, savings and loan associations, and credit unions. It also pertains to U.S. branches and agencies of foreign banks, Edge Act corporations, and agreement corporations. Typically, the ideal loan-to-deposit ratio is 80% to 90%. A loan-to-deposit ratio of 100% means a bank loaned one dollar to customers for every dollar received in deposits it received. In order to lend out more, a bank must secure new deposits by attracting more customers. Without deposits, there would be no loans, or in other words, deposits create loans. ... If the reserve requirement is 10% (i.e., 0.1) then the multiplier is 10, meaning banks are able to lend out 10 times more than their reserves.
